BetterTrades looks at Detroit's possble Bailout - December 8, 2008

Is Detroit positioned for a government bailout? In an announcement earlier this morning, White House officials stated that they were close to reaching a deal with Congress that would enact a bailout plan for the Big 3, General Motors (GM), Ford (F) and Chrysler.

In a proposal that could be signed sometime today, it seems apparent that the plan, which will be drawn from the program that was originally meant for the automakers to produce fuel-efficient vehicles, may total upwards of $15B.

Over the past several weeks, the Big 3 has petitioned Congress for $34B worth of bailout capital. However, analysts believe that the total price needed to revive the industry could reach levels near $125B.

Just last week, GM requested an additional $4B in short-term loans from the government by January, on top of the $4B they asked for to help them through the remainder of the year. Ford, meanwhile, asked for a line of credit worth $9B, while Chrysler needs $7B, both desperately needed by December 31.

In exchange for the emergency funds, the Big 3 would be subject to terms similar to those placed on the banking institutions, which received capital under the $700B Wall Street bailout plan. Stipulations within the auto industry plan places limits on their top executives' salary packages and the discontinuation of paying dividends.

Additionally, the automakers would have to give the government a chunk of future gains and guarantee that taxpayers would be reimbursed before any other shareholders. One last provision includes the creation of a so called “car czar.”

Within the new position, the “car czar” would oversee the bailout plan, the progress of corporate procedures and any additional concession made by the United Auto Workers union. The position would also take the lead on an oversight board to be made up of five cabinet secretaries from the Department of Treasury, Labor, Commerce, Energy and Transportation, along with the head of the Environmental Protection Agency (EPA).

As a side note, there may be the possibility of merger talks resuming between GM and Chrysler. Back in September, GM and Cerberus Capital Management LP, which is the parent company of Chrysler, began discussions of combining the two automakers. However, talks subsided when the financial crisis reared its ugly head.

If merger talks were to take up again, analysts believe that some 40,000 workers could potentially lose their jobs with the combining of the two companies. Read more about the merger talks at Reuters.

Shares of Ford and GM, the two that are publicly traded, surged in trading today, as Ford shares jumped over 26% to $3.19 a share, while shares of GM added nearly 19%, to $4.74 a share.

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